Square Mile’s 3D team, dedicated to analysing funds with responsible investment mandates, unveils its new approach to 3D fund reports following a revision of its assessment methodology.
All funds will now be categorised into one of four classifications – 3D Mixed Goals, 3D Improver, 3D Focus, or 3D Impact – complementing those introduced by SDR while allowing for objectivity based on the 3D process in recognition of the frequently nuanced approaches to sustainable investing. They will then be awarded a Gold, Silver, Bronze or Reviewed medal, depending on the strengths of their credentials in their respective classification.
The proliferation of responsible investment funds, varied ways of expressing sustainability philosophies and differing approaches to assessing funds combine to present challenges to advisers wishing to make like-for-like fund comparisons. The revised 3D Investing methodology and reports aim to address this by creating a standardised sustainability profile and rating framework enabling them to review and compare funds against the 3D assessment process.
Underpinning the assessment methodology is the 3D framework comprising three pillars: “Do Good”, “Avoid Harm” and “Lead Change”. This framework is designed to help investors make informed decisions through detailed profiles of how funds fare from a responsible perspective and compare to other strategies within their peer group.
3D Investing’s analysis is based on evidence: all funds undergo a detailed examination of their holdings to determine the extent of their exposure to social and environmental solutions whilst identifying any controversies. These holdings, and weightings to them, are obtained from the fund manager, who must also complete detailed questionnaires at both fund and company level to enable an assessment across a range of criteria. For funds, these include their chosen SDR label, their approach, exclusions, ESG integration, voting practices and engagement, impact footprint and outputs; and at a company level, research process, advocacy and stewardship and corporate culture. The 3D team interrogates the response to these questionnaires through in-person interviews with fund managers and company executives.
As part of this process, all fund holdings will be screened through 3D Atlas, Square Mile’s proprietary dataset of approximately 10,000 company activities, grouped into some 390 distinct revenue streams. These are then mapped against 3D Investing’s thematic classifications to demonstrate a portfolio’s aggregate tilt to a range of sustainable themes whilst also highlighting exposures to any harmful revenue activities
Once all this information is collated, a fund’s credentials will be assessed against its chosen SDR label. Where a fund does not have an official SDR label, 3D will assign an appropriate classification based on analysis of a fund’s sustainable objective, its formal documentation, and expected outcome when run through the 3D process. The fund will then be awarded a 3D medal (Gold, Silver, Bronze or Reviewed for funds without an explicit responsible investment objective) and issued a four-page 3D report including detail on its classification, key facts, 3D solutions breakdown, top ten revenue activities, revenue-source sustainability analysis, and controversial activity and harmful impact exposure.
Jock Glover, Square Mile’s Strategic Relationships Director, said, “Square Mile’s fund research has always been squarely focussed on helping advisers make better informed investment decisions to help their clients achieve their long-term financial objectives. However, making fair comparisons between funds with responsible and sustainable mandates has become increasingly challenging as the universe of these strategies has rapidly expanded. This has created a potentially baffling array of options of funds with nuanced approaches to sustainable investment. The introduction of the SDR labelling regime aims to provide greater clarity, but there is still the need for fund analysis that applies a standardised methodology to better enable comparisons between strategies.
“We have invested significantly in 3D Investing. Our revised methodology means that our analysis supports advisers in a constantly evolving market and regulatory backdrop. It offers a multitude of benefits to advisers and investors, including enhanced transparency, research-led opinion with a standardised sustainability profile and rating framework at its core.”
